Is semiannual reporting on the horizon?

On the White House lawn before he boarded a helicopter for the Hamptons and his New Jersey golf club for the weekend, reporters had the opportunity to lob a few questions at the president. While most of the questions were about security clearances and the criminal trials of his former staff, a different topic suddenly emerged in connection with an early morning tweet about quarterly reporting. The president said that, in his discussions with leaders of the business community regarding ways to improve the business environment, Indra Nooyi, the outgoing CEO of Pepsico, had suggested that one way to help business would be to trim the periodic reporting requirements from quarterly to semiannually. The argument is that the change would not only save time and money, but would also help to deter “short-termism,” as companies would not need to focus on meeting analysts’ expectations on a quarterly basis at the expense of longer term thinking. (For more on short-termism, see, e.g., this PubCo post.) He agreed that “we are not thinking far enough out,” and had asked the SEC to look into it.

On the White House lawn before he boarded a helicopter for the Hamptons and his New Jersey golf club for the weekend, reporters had the opportunity to lob a few questions at the president. While most of the questions were about security clearances and the criminal trials of his former staff, a different topic suddenly emerged in connection with an early morning tweet about quarterly reporting. The president said that, in his discussions with leaders of the business community regarding ways to improve the business environment, Indra Nooyi, the outgoing CEO of Pepsico, had suggested that one way to help business would be to trim the periodic reporting requirements from quarterly to semiannually. The argument is that the change would not only save time and money, but would also help to deter “short-termism,” as companies would not need to focus on meeting analysts’ expectations on a quarterly basis at the expense of longer term thinking. (For more on short-termism, see, e.g., this PubCo post.) He agreed that “we are not thinking far enough out,” and had asked the SEC to look into it.

According to the WSJ, the issue had been raised during a meeting with a group of executives. Apparently, Nooyi “broached the idea of making the U.S. reporting system more like Europe’s, in which companies are required to report some financial information only twice a year…. ‘Most agree that a short-term only view can inhibit long-term strategy’” Ms. Nooyi said in a statement. ‘My comments were made in that broader context, and included a suggestion to explore the harmonization of the European system and the U.S. system of financial reporting. In the end, all companies have to balance short-term and long-term performance.’”

In response to the president’s comment, SEC Chair Jay Clayton issued a statement:

“The President has highlighted a key consideration for American companies and, importantly, American investors and their families—encouraging long-term investment in our country. Many investors and market participants share this perspective on the importance of long-term investing. Recently, the SEC has implemented—and continues to consider—a variety of regulatory changes that encourage long-term capital formation while preserving and, in many instances, enhancing key investor protections. In addition, the SEC’s Division of Corporation Finance continues to study public company reporting requirements, including the frequency of reporting. As always, the SEC welcomes input from companies, investors, and other market participants as our staff considers these important matters.”

(Note that, in that spirit, the SEC later announced that it had voted to adopt, without an open meeting, a final version of the “Disclosure Update and Simplification release,” which, weighing in at 314 pages, can’t be all that simple. These rule amendments eliminate certain duplicative, overlapping or outdated disclosures, originally proposed in 2016. PubCo post to follow.)

Surprise, surprise—opinion on the question of quarterly reporting is divided. In June, investor Warren Buffett and JPMorgan CEO Jamie Dimon wrote a WSJ op-ed advocating a move away from quarterly guidance, but reaffirming their support for quarterly reporting:

“Our views on quarterly earnings forecasts should not be misconstrued as opposition to quarterly and annual reporting. Transparency about financial and operating results is an essential aspect of U.S. public markets, and we support being open with shareholders about actual financial and operational metrics. U.S. public companies will continue to provide annual and quarterly reporting that offers a retrospective look at actual performance so that the public, including shareholders and other stakeholders, can reliably assess real progress.”

And one investment strategist quoted in this Reuters article called it a “cockamamie idea. For starters, what’s the difference between six and three months? … Either way we’re talking about a very short-term period.” The WSJ reports that a “CFA Institute study last year of companies in the U.K., where quarterly-reporting requirements were imposed in 2007 but later dropped, found the frequency of a company’s earnings reports didn’t materially affect its level of corporate investment.” (Compare that with a recent study, “Frequent Financial Reporting and Managerial Myopia,” which appeared in the March 2018 issue of The Accounting Review. That study concluded that, “when new regulatory mandates forced companies to increase the frequency of their financial reporting, they reduced their annual capital investments by about 1.5% or 1.9% of their total assets, depending on how capital investments are defined.” It also reported that the level of reduction should be considered in light of the fact that “the average annual capital investments of these firms amounted to about 9% of assets.”)

The Washington Post reports that, according to governance experts, the proposal “would require an overhaul of the basic accounting system used by companies since the Great Depression….The quarterly reports provide important insight into a company’s potential trouble spots and force its executives to address shareholders’ concerns. It also forces the companies to be more disciplined, they say. ‘Our whole accounting system is based around the quarter,’ [said one expert.] If a company struggles to meet quarterly profit expectations or executives feel pressured to manipulate results to reach Wall Street expectations, that reflects poor management and communication….‘Changing the reporting period is not going to change that.’” Governance experts also suggested that elimination of quarterly reporting “could also lead investors to fill the information vacuum by relying more heavily on rumors and off-the-cuff remarks made by company executives.” In addition, according to Bloomberg, some argue that “fewer financial reports could encourage insider trading and exacerbate volatility around earnings.” See also this Bloomberg discussion of the pros and cons of the idea.

On the other hand, some business groups view the pressure of quarterly reporting as one of the deterrents to going public and maintaining public company status and, as a result, have been advocating for a change in the periodic reporting system. For example, in Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public, eight organizations—the American Securities Association, Biotechnology Innovation Organization, Equity Dealers of America, Nasdaq, National Venture Capital Association, Securities Industry and Financial Markets Association, TechNet and the U.S. Chamber of Commerce—made a number of recommendations about how to revitalize the IPO market and make public company status more appealing. Among these was a recommendation to simplify quarterly reporting requirements and give EGCs the option to issue a press release with earnings results in lieu of a 10-Q. The underlying intention was to “provide investors with the material information they need to make informed decisions but reduce some of the unnecessary burden associated with the current quarterly reporting system.” Similarly, Nasdaq has sent out correspondence advocating support for H.R.5970, which would require the SEC to issue new rules allowing exchange-traded companies to elect to disclose quarterly financial information in a simplified manner, such as through a press release or by a shortened form, instead of on a Form 10-Q. (See this PubCo post.) In addition, proposed JOBS Act 3.0 would, if signed into law, require the SEC to conduct an analysis and report on the costs and benefits to companies, investors and other market participants of the Form 10-Q requirement for EGCs and other reporting companies, including the costs and benefits of the public availability of the information required to be filed on Form 10–Q, the use of a standardized reporting format across all classes of reporting companies, and quarterly disclosure by some companies of financial information in formats other than Form 10–Q, such as a quarterly earnings press release. (See this PubCo post.)

Whether a change this momentous actually comes to fruition is anyone’s guess. The current system has been in place for almost 50 years, so any shift of that kind would certainly involve substantial study and a lengthy period of public comment. If semiannual reporting is on the horizon, I would guess that it’s a fairly distant horizon.

This blog is provided for general informational purposes only and no attorney-client relationship with the law firm Cooley LLP and Cooley (UK) LLP is created with you when you use the blog. By using the blog, you agree that the information on this blog does not constitute legal or other professional advice. Do not send any confidential information through the blog or by email to Cooley LLP and Cooley (UK) LLP, neither of whom will have any duty to keep it confidential. The blog is not a substitute for obtaining legal advice from a qualified attorney licensed in your state. The information on the blog may be changed without notice and is not guaranteed to be complete, correct or up-to-date, and may not reflect the most current legal developments. The opinions expressed on the blog are the opinions of the authors only and not those of Cooley LLP and Cooley (UK) LLP.